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Connections with Leading Thinkers – Otaviano Canuto

Armen Ovanessoff and Eduardo Plastino of the Accenture Institute for High Performance interview Otaviano Canuto as part of a research project on collaborative innovation.

As part of the Accenture Institute for High Performance's mission to develop cutting-edge new ideas and insights, researchers often seek the views of academic leaders, business executives and industry analysts. The Connections with Leading Thinkers series captures some of those interviews, showcasing interactions and discussions with some of the world's leading experts.

Otaviano Canuto is an Executive Director at the International Monetary Fund (IMF), in whose Board he represents Brazil and casts the votes of eleven countries in total. His résumé includes, among other positions, that of Vice President of the World Bank, where he also served as Senior Advisor on BRICS (Brazil, Russia, India, China and South Africa). In Brazil, Canuto was Secretary for International Affairs at the Ministry of Finance. He was also a Professor of Economics at the Universities of São Paulo (USP) and Campinas (UNICAMP). Eduardo Plastino of the Accenture Institute for High Performance interviewed him as part of a research project on innovation in the Brazilian economy.

There is a lot of concern in Brazil over the low levels of innovation in the national economy. What explains the country’s poor performance?

It is a complex problem provoked by a number of factors. Let me highlight four key ones: Brazil has cultural issues in the business community that undermine innovation, its economy is too closed, there is a poor business environment and education levels are low.

What are the cultural issues in the business community?

Brazilian businesspeople are excessively risk averse and prone to focusing on the short term. Clearly, these attitudes are related to some of the other aspects I mentioned. For example, the closed nature of the economy factors into businesses’ risk/reward calculations, making companies less willing to take on the risks that innovation entails.

How does the focus on the short term affect innovation?

By definition, an investment in innovation can pay off only in the future. So you need to be willing to focus at least to some degree on the longer term. “Shorttermism” has a far-reaching impact. For example, World Bank studies show that, as a share of national GDP, Brazilian companies collectively invest less in intangible assets than their peers in China and developed economies such as the US, Japan and the UK. Those assets include areas such as R&D, copyrighting, digitalized information and brand equity. This underinvestment in intangible assets is reflected in lower innovation, because such assets are key to supporting innovation.

Yet there are some shining examples of innovative companies in Brazil.

You’re right. They show that the country does have a lot of potential and that it is unfair to generalize. Some Brazilian companies do think in the longer term. For example, they send talented employees to complete their MBAs at the best US universities. They know that this kind of effort will pay generous dividends in the future.

What other indicators point to Brazil’s innovation potential?

Its scientific production is a case in point. Brazil is not doing badly here. We have seen a huge increase in the country’s scientific output, as measured by number of papers published, for example. But there is a huge gap between such output from Brazilian centers of academic excellence and Brazilian companies’ innovation output. The country must narrow that gap.

What do you think of the Brazilian government’s efforts to boost innovation, such as bills that lower taxes for companies that invest in R&D?

We have seen significant improvements in the financing area. Maybe it is a bit early to judge the outcome of these efforts, because increases in financing opportunities have been really impressive in the last two or three years. This is a necessary condition for innovation, especially when you don’t have a culture of angel investors as strong as in places such as Silicon Valley, or many venture capitalists with a long-term investment horizon. Unfortunately, Brazil is still lagging in other areas, especially those that are unrelated to innovation but that affect it directly. Such areas include the closed nature of Brazil’s economy and the difficulty Brazilian companies face in trying to access foreign inputs and technologies. Brazil is also still struggling with uncertainty over the economy’s long-term stability, which businesses need to develop plans for many years from now. In areas such as those, there is a lot of work to be done.

Would Brazil benefit from more collaboration between the different players in innovation ecosystems?

Yes. A typical example is the low level of collaboration between companies and academia in Brazil. Collaboration depends on incentives, on what each partner can get from it. And in many cases, the potential value depends on the institutional arrangements involved. In the case of universities, the problem is that academics are assessed to a large degree by how much they publish. That does little to encourage collaboration between academia and businesses.

It is tempting to use Silicon Valley, and the United States overall, as an example of what an innovative economy looks like. Do you believe Brazil can learn lessons from innovation in other countries, too?

Yes, I believe that international experiences offer us major lessons. One such lesson comes from countries that have “leapfrogged” in innovation and in average income in the last few decades. Such countries have an advanced, widely available ICT infrastructure. How they accomplished this varies—in some countries, the government supported national champions; in others, that path was different. It really depends on local conditions. But the lesson is that, whatever the chosen path, the country made an effort to guarantee widespread access to high-quality ICT. This is important because innovations require intensive information and knowledge sharing to ensure (for example) that consumers and businesses can access new software quickly. Brazil has paid a heavy price for not advancing that much toward this frontier.

Are there other lessons, in addition to the importance of making ICT infrastructure widely available?

Countries that have managed to boost innovation and raise income levels have minimized business transaction costs. A modern, technology-intensive economy is transaction-intensive. So a business environment that increases transaction costs puts a heavy burden on the economy. If Brazil wants an economy that generates more innovation, one with strong collaboration, it can’t afford to keep its poor business environment. Also, a transaction-intensive economy is a contract-intensive economy, so a key aspect of this is the resolution of contract-related conflicts. If such conflicts impose a huge cost on all involved, that is a significant disincentive for innovating.

What kinds of questions does Brazil need to ask itself, in seeking to learn about innovation from other countries?

One controversial question concerns the job market, which is strictly regulated in Brazil today. Arguably, the country needs to make the job market more flexible to encourage innovation. This is because innovative activities are intrinsically risky. Brazilian businesses think twice before engaging in innovative activities, because such activities require new hires. It is extremely costly to fire people if the innovation effort they were hired for ultimately fails. And many innovation efforts will inevitably fail. Maybe we could envision a system in which workers hired for innovative activities accept less job security in return for higher compensation should their project prosper. The point of this argument is that Brazil’s job market needs more flexibility to ensure that the risk and reward incentives work as they should.

Clearly, this kind of approach would affect job security. Are there any additional reasons it would be controversial?

The problem is that, while the logic seems sound, the empirical evidence is mixed. More specifically, Japan is a significant exception to the rule. It has had a stable job market as well as strong performance in innovation for a long time. This is why I place less certainty on the flexible job market argument than on the other potential solutions I have mentioned.

Given the difficulties that Brazilian companies face, including greater competition from imports or from foreign companies setting up operations in the country, how can they remain competitive?

They really need to increase pressure on the government to improve the business environment in the country. Otherwise, they will face an increasingly unlevel playing field. Unfortunately, the standard reaction of many Brazilian businesses is to ask for protection in the form of higher import tariffs or fiscal subsidies. This is a problem, not least because the country’s fiscal capacity is exhausted and the government cannot impose trade barriers without jeopardizing the wider economy. You just can’t help everyone. Moreover, subsidies and protectionist trade policies are short-term solutions. They only amplify the short-termism that undermines the vigor and innovative capacity of Brazil’s corporate sector.

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